Thursday, August 06, 2009

Seeing the Corporate Tax Tree from the Forest of Taxes

A couple of days ago I linked to a study by the Tax Foundation about corporate taxes and their downward effect on wages. Today, they offer an international comparison of corporate tax rates.

I've always heard that, bitch as we may, the United States still does pretty well with regards to the whole picture of taxes as compared to other countries. Capital account surpluses certainly speak to this idea. But the Tax Foundation gives a different story. Then again, it could be the case that the U.S. could have a comparatively poor corporate tax system but a very favorable everything-else system. This would hold true if, for example, the U.S. imposed only corporate taxes. I know that isn't the case, but that would be an explanation that would fit both sides.

Time to consult the Economic Freedom of the World Index!

How does the U.S. do in Area 1? (Area 1 is the Size of Government: Expenditures, Taxes and Enterprises.) Out of the 130 countries that get a score, the U.S. ranks 40th. However, the crux of the Tax Foundation report is that the U.S. has the second worst corporate tax rate in the OECD, trailing only Japan. How does the U.S. do in the freedom rankings concerning government expenditure and taxation compared to these countries? Considerably better; only three of the OECD countries mentioned in the Tax Foundation report-- Mexico, Switzerland, and Turkey-- score better than the United States. The other twenty-six have more onerous governments to deal with.

Granted, we're comparing 2009 tax rates with the most recent Freedom of the World Report, which outlines 2006-- but could things have changed that drastically in three years? I'd say probably not. I think this is a case of picking one tree from the forest. Those in West Virginia that like to say things aren't so bad do the same thing-- find one tax rate (personal income tax is a good example, if I remember correctly) that's comparable to the rest of the country, then say, "See? Taxes can't be the problem."

Don't get me wrong-- lower corporate taxes would be better. Absolutely. Cut them. Keep cutting them-- because they do matter. And I love the story the Tax Foundation provides that shows just that:

"Great Britain has found out [that companies will relocate in the face of high taxes] the hard way. Last year, Google moved its European operation from London to Switzerland to lower its tax bill and McDonald's recently announced that it was doing the same. Great Britain's relatively high corporate tax rate combined with its world-wide tax system has caused an exodus of domestic firms to lower-taxed countries such as Ireland and Switzerland."

But sometimes-- and especially when it comes to tax systems-- it's useful to see the entire forest from the trees.

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